Tuesday, December 7, 2010

Punishing the Banks

It is a heartfelt account of the tragedy of the Irish economic situation. It highlights the injustice of the seemingly unlimited bank bailout for those who precipitated the crisis. Yet, no matter how much we explain the cause of the crisis, it is the ordinary Irish voter who is facing the consequences of high unemployment, spending cuts and a fragile economy.

In France, Eric Cantona suggests a mass withdrawal of cash from French banks on December 7th. This will be about as helpful as asking Nicolas Sarkozy to play for the French football team, or asking Silvio Berlusconi to head an EU wide Ethics and morality committee.

The irony is that a mass withdrawal of cash could create a liquidity shortage, and the French government offering a bailout to the banks. I guess this would come from taxpayers who withdrew the cash. It certainly wouldn't hurt the bankers.

Economics is more concerned with the optimal distribution of resources that dealing with injustice. But, given the nature of the crisis, a rescue package should have, at least, shared the burden between taxpayer and banks. To offer an unlimited bailout for a banking system that is not just illiquid, but broke is wrong. The government could have made bond holders pay some of the cost.

The best way to learn from this banking crisis would be to put in place reforms which reduce the incentive for banks to get carried away with lending in a boom. Easier said than done, but there are some policies which would help. Bank Reforms

3 comments:

You are right that the system should evolve so that bankers have less incentive to get into bad investments of extraprodinary proportions due to inordinately high risk taking with depositors' money and shareholder's money. But how? The common belief that punishing some bankers will stop such incidence from happening is a foolish idea. The number of bankers are a negligible percentage of the population of bank shareholders and bank depositors. And, the few hundreds of bankers who can be blamed ex post for having taken redicously risky decisions are a tiny fraction of the people. In fact bankers have the natural right to go right or wrong in their decisions. The kind of financial crisis that economies land in is because of systematic encouragement and prodding by politicians and governments to deploy an extraordinarily high percentage of bank funds into highly risky sectors: this is exactly what happened in the US when most banks were encouraged to get into investment in home-loans and home-loan mortgae backed securities by the Government and its sonsored institutions like the Fredie Mac and Fennie May and the politicians., with the regulators at Fed and Treasury Department knowing that the banwagon in Homeloan was getting disproportionately higher to endanger systemetic risk of failure of system was unwilling to call the bankers and caution them or their shareholders and depositors. It is the imprudent and highly risky behavious of politicians, government and official regulators that was responsible for the ban failures and financial crisis. No politician, regulators or government official has been punished and they are the guys whom the people are trusting to make suitable reforms!!!. These people bailed themselves out of their responsibilty for the failure by using public monet to finance schemes of so-called bailout of banks that did not compensate the investors at all: the distressed bank shareholders have lost heavily as also the investors who invested in the bonds issued by banks. The politicians and regulators will always design systems so that they can escape when things go wrong, and making a few businessmen or fraudsrers as sacegoats for crisis and loss of huge magnitude to the national economies. And, economists and elite and the media analysts still believe the false notion that such huge losses can be inflicted in a competitive market system by a handful of private sector individuals. Till such time we are able to reform the governance of the political system, the crises will occur again and again in financial markets: because, all reforms will never impose any obligations of performance monitoring and evaluation, responsibility and accountability on the politicians and regulators appointed by them. The people who cause crises will always remain outside the ambit of suspicion.

You are right that the system should evolve so that bankers have less incentive to get into bad investments of extraprodinary proportions due to inordinately high risk taking with depositors' money and shareholder's money. But how? The common belief that punishing some bankers will stop such incidence from happening is a foolish idea. The number of bankers are a negligible percentage of the population of bank shareholders and bank depositors. And, the few hundreds of bankers who can be blamed ex post for having taken redicously risky decisions are a tiny fraction of the people. In fact bankers have the natural right to go right or wrong in their decisions. The kind of financial crisis that economies land in is because of systematic encouragement and prodding by politicians and governments to deploy an extraordinarily high percentage of bank funds into highly risky sectors: this is exactly what happened in the US when most banks were encouraged to get into investment in home-loans and home-loan mortgae backed securities by the Government and its sonsored institutions like the Fredie Mac and Fennie May and the politicians., with the regulators at Fed and Treasury Department knowing that the banwagon in Homeloan was getting disproportionately higher to endanger systemetic risk of failure of system was unwilling to call the bankers and caution them or their shareholders and depositors. It is the imprudent and highly risky behavious of politicians, government and official regulators that was responsible for the ban failures and financial crisis. No politician, regulators or government official has been punished and they are the guys whom the people are trusting to make suitable reforms!!!. These people bailed themselves out of their responsibilty for the failure by using public monet to finance schemes of so-called bailout of banks that did not compensate the investors at all: the distressed bank shareholders have lost heavily as also the investors who invested in the bonds issued by banks. The politicians and regulators will always design systems so that they can escape when things go wrong, and making a few businessmen or fraudsrers as sacegoats for crisis and loss of huge magnitude to the national economies. And, economists and elite and the media analysts still believe the false notion that such huge losses can be inflicted in a competitive market system by a handful of private sector individuals. Till such time we are able to reform the governance of the political system, the crises will occur again and again in financial markets: because, all reforms will never impose any obligations of performance monitoring and evaluation, responsibility and accountability on the politicians and regulators appointed by them. The people who cause crises will always remain outside the ambit of suspicion.